Policy responses
The potential for market failures in knowledge is reflected in the range of specific institutions and policies that exist.
Most OECD countries (including New Zealand) have adopted a range of institutions and policy options to address potential market failures around knowledge creation and diffusion. As discussed above, the key market failures are spillovers and the competing incentives for creation and diffusion of knowledge. Market failures in turn may, but do not necessarily, justify policy interventions that try to improve on laissez-faire market outcomes.
This paper does not discuss policy options in detail or offer policy recommendations. Rather, it describes some of the main policies that have been adopted by governments and explains the rationale for them within the framework developed in the paper. The institutions and policies discussed use a variety of mechanisms to internalise spillovers and partly overcome the tension between knowledge creation on the one hand and knowledge diffusion and use on the other. None of them is a perfect solution; typically countries adopt a mixture of these approaches and the policy question becomes one of choosing the best level of each and balance between them.
Intellectual Property Rights
Intellectual property rights (IPRs) include patents, copyright and trademarks. In one sense they simply establish property rights for intellectual goods in the same way as rights exist for ordinary goods and services. By giving the owner (the knowledge creator) the right to exclude others from using the knowledge unless they pay an agreed sum, IPRs generate incentives to create and sell knowledge that will be useful directly or indirectly to consumers.
A problem with IPRs is that they give monopoly power over the use of something that actually costs nothing (because knowledge is non-rival) for another firm or consumer to use. If this power were unlimited, the owner could also inhibit other researchers from using this piece of knowledge as a building block to further discoveries. Given the cumulative nature of knowledge, monopoly power would have very high social costs. For both reasons, IPRs are generally limited in various ways. For example, patents are time limited, they require the applicant to publicly disclose the nature of the invention, and they do not permit excluding others from using the knowledge to conduct further research. By creating a right but limiting it in these ways, patents strike a compromise between knowledge creation and knowledge diffusion and use.
Subsidising open science
The institution of open science involves communities of scholars with a commitment to high standards of research as judged largely by peer review. In turn peer review requires laying out research results in a very open way. The incentive on individual scientists comes mostly in the form of recognition for being the first person to make a discovery, rather than monetary reward. The culture of the community entails great respect for originality and disapproval of any form of plagiarism or lack of acknowledgement of the intellectual precedents of people’s own research.
Status also accrues to scholars in relation to the number of citations to their published work. This provides an incentive for making discoveries that others will find interesting and useful for further research.
Clearly the features of open science comprise a package of incentives that encourage the creation, use and dissemination of knowledge. On the downside, open science is generally expensive on the public purse or it requires a high level of private philanthropy. Also, because science is often isolated from market signals, there may be limited incentives on researchers to ensure their work is relevant to the needs of society as a whole.
Public subsidies for private R&D
Public subsidies for private R&D come in the form of either tax concessions or grants to firms that undertake spending on research and development. The primary motivation for such a subsidy is that it compensates firms undertaking R&D for the spillover benefits that accrue to other firms. As described earlier in the paper, the evidence is that these spillovers are on average substantial. In the absence of a subsidy firms will tend to under spend on R&D from the point of view of the economy as a whole.
Direct government purchase of research
In many countries, including New Zealand, the government purchases research directly either by choosing among offers from potential research providers or through direct funding of research organisations. Sometimes the government uses the knowledge resulting from this research to help it provide goods and services such as military and civil defense, environmental protection and public health services. In other cases, the new knowledge is the fruit of basic research and it is published according to the norms of open science. In still other cases, the rights to the intellectual property created are assigned to the research provider to exploit commercially.
Government purchase aims to encourage the creation of more knowledge than would otherwise occur, and in some cases the funding also encourages dissemination and wider use.
